Real Estate Taxation (How To Avoid Limiting Rental Property Tax Deductions!)

Rental Property Tax Deductions and how to avoid losing them! Real Estate Taxation Episode# 2

Time stamps so you can jump to any point in the video!
0:00 Introduction to Real Estate Taxation
3:18 Personal Use Day Limitations
5:00 Personal use day example
7:22 Allocating rental expenses
10:25 Personal Use Day Exceptions

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Real estate offers numerous tax advantages and can be a wonderful investment for you but if you are currently a landlord or thinking about coming one the first thing we need to teach you is how to not to lose tax deductions, and there are several ways to lose tax deductions in rental real estate, and that is no bueno.

So if you think you can use your rental property whenever you want and still be able to deduct all of the expenses you may find yourself disappointed. Taxes for rental real estate involves a lot of tracking and record keeping and one of the first things to get used to tracking is the number of days you use the property personally. This is known as Personal-Use Days. If you are not using the property personally, and renting it at fair market value rents this is known as Fair Rental Days

Personal use days include:
You using the property personally (The most common example for this is let's say someone buys a vacation home near the beach. Most of the year they have it available for rent, but a few weeks of the year they live in the home, and use it personally.) The days they use it for their own benefit is known as personal-use days.

Now what if you are just using the property to fix it up and restore it, clean it, paint, etc. Good news is this doesn’t count as a pesronal-use day.

Renting it out to friends and family at rents that are less than fair market value. Fair rent must be charged. For example if you are renting the property to your daughter at $500 per month, but fair market value rent is around $1,000 a month this is known as personal use days.

Your rental expenses either become no longer deductible or only partially deductible. By partially deductible I mean you must pro-rate the expenses between tax form Schedule E and Schedule A based on number of personal use days vs fair rental days.

If that sounds confusing don’t worry let me give you an example, and it will be easier to understand.

Let's say Chipper have a rental property and out of the whole year you use the property personally for 25% of the year and the other 75% of the year you legitimately rent out the property.

Are you going to be able to deduct all of your rental expenses on this property? The answer is no.

Let's say this person’s property taxes on this rental property totaled to $3,000. From a tax deduction standpoint this is how this would look for the property taxes.

On schedule E they can deduct up to 75% of the property taxes. Which is $2,250

However, since 25% was personal use the other $750 must be reported on itemized deduction SCH A.

This type of allocation would be applied to other rental expenses for this property as well such as mortgage interest, and utilities.

Repairs may not be subject to such limitations depending on the circumstances.

So as you can see it is imperative you keep good records on your personal-use days vs Fair Rent days if you want to maximize your deductions .

exceptions to these rules?

If there are more than 14 days of personal use and the home is rented 14 days or less, no allocation is required, the home is treated entirely as personal-use property.

No personal-use limitations apply If you the property is used personally for no more than the greater of 14 days or 10% of the number of days rented at fair market value